TAXATION OF AOP/BOI
Association of person: The Indian Income Tax Act, 1961, defines AOP (Association of person) as an integration of person for a mutual benefit or a common purpose. They may be individual or artificial person such as LLP or a Company. For example, two companies may join together and form an AOP for the achievement of a common objective.
Body of individual: BOI (Body of Individuals) is similar to an AOP and is also an accumulation of individuals who have come together with an objective of earning some income. For example, two individuals may get together and do something together to earn some income.
An Association of Persons (AOP) and a Body of Individuals (BOI) convey two different arrangements of people. The fact that both of these expressions at time are used interchangeably doesn’t justify the respective interpretation. We need to stop interchanging the usage of these words as they represent two different compositions.
There are certain differences between an Association of Persons and Body of Individuals. A person in AOP could be a company or an individual person. The term person could include any association, body of individuals or company, irrespective of whether it is incorporated or not.
However, in a BOI, only individuals can join with the intention of earning some income. Hence, we can say, BOI only comprises of individuals, whereas an AOP could include legal entities.
The tax rates of AOP/ BOI are as follows:
|
Shares of Member (known/ unknown) |
Criteria |
Tax rates |
|
Shares of Members are Known |
Part A: All members having net taxable income is up to basic exemption limit |
Tax at slab rate like individual. |
|
Part B: One or more members having net taxable income greater than basic exemption limit |
Tax on Entire Income @ Maximum Marginal Rate i.e. 39% or 42.744%. |
|
|
Shares of Members are unknown |
Shares of Members are unknown |
Tax on Entire Income @ Maximum Marginal Rate i.e. 39% or 42.744%. |
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NOTES: i. In computing Net Taxable Income of member his share from this AOP/ BOI shall be excluded. ii. If AOP/ BOI pay tax as per default tax regime u/s 115BAC then MMR is 39% (30%+ 25% + 4%) otherwise it is 42.744% (30% + 37% + 4%). iii. Loss of AOP/ BOI shall be c/f by such AOP/ BOI. iv. If AOP/ BOI pay tax as per normal tax rate (slab rate) then special rates of income tax (like LTCG/ STCG 111A/ LTCG 112A) shall be taxable at special rates of tax only. If AOP/ BOI pay tax as per MMR then special rate of tax income shall be taxable as per MMR only. |
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Example:
KJ Associates is an Association of Person (AOP) consisting of two members, J and K, Shares of the members are: 60%(K) and 40%(J). Income of the AOP for the previous year 2024-25 is Rs. 10 lakhs.
Compute the tax liability of AOP and the members in the following situations, assuming K & J do not opt to pay tax as per Section 115BAC:
Solution:
Taxability of KJ Associates
Taxability of K & J
|
|
Particulars |
K (Rs.) |
J (Rs.) |
|
(i) |
Share of Profit from AOP |
Exempt |
Exempt |
|
|
Income from other sources |
1,00,000 |
2,70,000 |
|
|
Total Income |
1,00,000 |
2,70,000 |
|
|
Tax Liability |
Nil |
1,000 |
|
|
Rebate u/s 87A |
– |
1,000 |
|
|
Total Tax Payable |
Nil |
Nil |
|
|
|
|
|
|
(ii) |
Share of Profit from AOP |
6,00,000 |
4,00,000 |
|
|
Income from other sources |
1,00,000 |
1,20,000 |
|
|
(A) |
7,00,000 |
5,20,000 |
|
|
Tax Liability |
52,500 |
16,500 |
|
|
Add: HEC @4% |
2,100 |
660 |
|
|
Total Tax Payable (B) |
54,600 |
17,160 |
|
|
Average Rate of tax (B/A * 100) |
7.8% |
3.3% |
|
|
Total Tax Liability |
54,600 |
17,160 |
|
|
Less: Rebate u/s 86 in respect of profit from AOP (share in AOP * average rate of tax) |
46,800 |
13,200 |
|
|
Tax Liability of Members |
7,800 |
3,960 |
Interest, salary, bonus, commission paid by AOP/ BOI to its members it shall be disallowed while computing PGBP.
NOTE:
If any interest is received from the member to whom any interest is paid, then only the Net Interest shall be disallowed.
Member share in AOP/ BOI can be computed as below:
|
Step No |
Explanation |
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|
Step 1 |
Compute Net Taxable income of AOP/ BOI, this shall be computed after disallowing salary & interest paid to members as per Section 40(ba). |
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Step 2 |
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Step 3 |
To the amount allocated in step 2, add the interest, remuneration to the respective members. The total shall be the members shares in income of AOP/ BOI. |
Why we need to compute member share?
AOP/ BOI is already chargeable to tax so members share should be exempt in their individual hands but if AOP/ BOI paid taxes as per slab rates then members share in income of AOP/ BOI shall be included in total income of members & members will claim rebate u/s 86. If AOP/ BOI has paid taxes @ MMR then members share shall not be included in the total income of members.
Computation of total income & tax of member
|
Share of AOP/ BOI |
xxx |
|
Add: Income from AOP/ BOI |
xxx |
|
Total Income |
xxx |
|
Tax liability on total income (including surcharge & cess) |
xxx |
|
Less: Rebate u/s 86 (Tax liability * share from AOP/ BOI)/ Total Income |
(xxx) |
|
Net Tax Payable by Member |
xxx |
|
NOTES: i. No rebate if the tax payable by AOP/ BOI is Nil. ii. The rebate shall be reduced after adding surcharge & education cess. |
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Summary: –
|
Partner on |
Interest Received on |
Treatment |
|
Individual Capacity |
Individual Capacity |
Interest disallowed as per Section 40(ba) . |
|
Representative Capacity |
Representative Capacity |
Interest disallowed as per Section 40(ba). |
|
Individual Capacity |
Representative Capacity |
Section 40(ba) not applicable so full interest is allowed. |
|
Representative Capacity |
Individual Capacity |
Section 40(ba) not applicable so full interest is allowed. |
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